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Does gold continue to remain a good investment option? Pros and cons

Dec 27, 2019 | 2 months ago | Read Time: 4 minutes | By iKnowledge Team
Does Gold Continue to Remain a Good Investment Option?

It is not uncommon to see Indians investing their hard-earned money on gold, even if that means buying gold jewellery. According to the World Gold Council, India is among the top gold buyers in the world [1]. Though gold bullion and coins certainly provide a sense of security, they do come with a set of potential risks and rewards, as in the case of any other investment.

As an investment, gold has witnessed ups and downs in its price, thereby reflecting volatility. Yet, it remains a favourite avenue for most, since it serves as a hedge against inflation. Even when the price of gold declines, investment experts believe it is mostly temporary and will be offset in the long run.

But before you take the plunge to invest in gold, here’s a look at the pros and cons:

PROS

1.Gold can diversify your portfolio

It is a great idea to diversify your financial portfolio by investing in gold, especially since they do not react to other tradeable assets, such as equity and fixed income returns. For years, gold has been looked at as a safe-haven investment, since it provides protection in times of high inflation. It is believed that when investors become risk-averse and take money out of assets, gold is one of the options they consider.

When it comes to investment, it isn’t important to limit your options only to gold jewellery. You can choose from a myriad of options, be it gold coins, gold exchange-traded fund (ETFs) or gold stocks. Of course, there’s no doubt, each of them has their own benefits and risks. You need to assess your needs and accordingly make the right decision.

2. It serves as a hedge against inflation

Gold has always been a saviour even during economic recession and market volatility. It is looked at as a hedge against inflation shocks, especially since it allows investors to secure their real returns, and in turn, their purchasing power.

During high inflationary periods, investors are generally threatened by equity and debt securities, since they could be expensive and are also likely to underperform. In the case of gold, it has historically performed well and continues to do so. This is primarily due to its limited supply and its value in many cultures. Besides, it is a commodity and not a paper asset, such as a government bond.

3. Easy Liquidity

As the term suggests, liquidity refers to how easy it is to buy or sell a specific product. In the case of gold, it possesses high liquidity. People use gold to stack cash, since it can be bought or sold anytime in the market. It is a good alternative to traditional investments such as stocks and bonds, since it is highly liquid and transparent. It is also treated by some as a commodity, though its nature is closest to currency or a hedge.

4. Tax Benefits

Gold ETFs that are older than a year attract long-term capital gains tax, though no VAT, Wealth Tax or Securities Transaction Tax is levied. When it comes to capital gains tax, there are two kinds that are levied, either short-term capital gains or long-term capital gains.

Under short term capital gains, it applies in the case of gold funds when profits are made prior through sale of holdings/units within 3 years of making the investment. On the contrary, long-term capital gains apply if the sale is made more than 36 months after the purchase is completed.

CONS

1.Volatility does exist in the case of gold

Volatility becomes significant while evaluating the risk of an investment, since it projects how prices fluctuate in each period. The greater the volatility, the wider the range of prices. If there’s high volatility, the price of the asset can take a dramatic turn and change over a short period in either direction. In case the volatility is low, the asset’s value fluctuates, but not as drastically.

Anything that happens in the economy – inflation, GDP, monsoon, war – will affect gold prices and result in violent swings.

2.No Regular Income

Gold is an asset that does not provide any regular income, unless you invest in the government’s gold monetisation scheme. Unlike investments like mutual funds, stocks or real estate, it will not generate dividends.

At best, gold serves the purpose of acting as an alternate currency. During demonetisation, it was the housewives who had saved huge amounts of cash to stand them in good stead, but gold would have helped better there.

3. You may already have exposure

Whoever has a diversified investment portfolio, particularly multi-asset funds, in that case gold would be a part of it and you might have to decide if that amount of gold is enough or you want to increase the amount of overall exposure.

4. Storage issues crop up in the case of gold

Physically buying and storing gold poses a significant challenge. Some find it risky to store gold at home, while others want to keep it within their reach. In case you plan to safely store it in bank lockers, it is not always imperative that the accessibility factor is taken care of. There’s no doubt about it being susceptible to theft wherever you store it, adding to more stress and burden.

Since long-term investment without any hassle is what’s on your mind, why not invest in  Unit Linked Plans that aggregates the very best of investment and insurance.

It has no premium allocation charges, which means more funds for investment! Best of all, this policy can be purchased online from the comfort of your home. To know about Aegon Life’s life insurance products like term insurance and other products, visit our home page.

Now that you have all the pros and cons of gold as an investment option, make a prudent decision and act wisely!

Citations:

[1] https://www.gold.org/data

[i] https://www.livemint.com/Opinion/yLqLISrnY6OAt9xtH13rnM/Who-are-the-biggest-buyers-of-gold-in-India.html

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